Investor · Cupertino, CA · Member since 2012 · 118 posts · 121 votes
I am in contract for this REO property: 8119 Eastpoint Blvd, Baytown, TX 77521 for $110k. I expect that rehab will take another $10k (max).
It is a 2005 built, 4 BR, 2500 sq ft home in decent school district. I am assuming rent of ~$1500. As such I am going to hold it as rental - I think the ARV (should I flip) is ~$155k. Even for rentals - I always want to make sure there is enough room for flip (to qualify it as a good deal).
This will be my 2nd acquisition in Houston area (note that I am in California) and I am hoping that it is better than the first deal I am closing today (23527 Hidden Maple Dr, Spring, TX)
That house is way too big for a rental. Every time you have to paint or carpet, it will cost you a fortune. More sq. footage, more repairs, maintenance and cap ex that needs to be allotted. My max for rentals is about 1500.
My single rental homes with sqft greater than 2500 (actual 3100) and rent of $1775/month has appreciated nicely in texas.
If you buy larger homes in B+/A neighborhoods you can get upside of appreciation. I know that's not as important as cash flow.....
Actually, I think appreciation is a HUGE upside and re-thinking this cash flow vs. appreciation equation.
I will only buy properties (SFR) with positive cash flow $200-$400/month but I'm going to target properties that have the most "potential" for appreciation by buying in good neighborhoods and locations.
The other key to appreciation is buying properties on the cheap or at a discount to start.
My "large" property = 3100 sqft 5bed 3ba home in houston area in 2014 bought for $150,000 now worth around $220,000-$230,000 based on comps. B+ neighborhood. Initial rent $1700/month. Lease renewed with same tenant for $1775/month. I don't mind a little extra paint/repairs when I see appreciation like that!
You're neglecting the 70% rule if you assume $10k in repairs and a purchase price of $110k with an ARV of $155k. You could always hope you'll see some appreciation, but from what I have read doing so is a gamble at best. After expenses your cash flow should be $750 less the mortgage. So it will cash flow. Just my two cents, let's see what the true experts have to say.
Thanks @Jason Eyerly . You are right that this doesn't fir the revered 70% rule for flip. However, note that my intent is not to flip. I care for the ARV info to an extent such that I don't lose money at all (should I need to exit the rental soon for any reason).
It is very difficult to abide by the 70% in newer construction properties (IMO) which need little rehab. However, I prefer lesser rehab properties (esp. when I am out of state and have to do everything remotely).
I live in Baytown, probably 1/2 a mile from this property, and you have to be very careful in this area of town. This propery lies on the north side of Baytown which is the area that is growing very rapidly, and will likely continue to do so. However, most of that growth is coming through new constructions with several builders putting communities in the area.
The Eastpoint neighborhood has been around for ~20 yrs if I had to guess, and there are probably 3-4 brand new communities within 2-3 miles of this property that would go to the same schools. So your competition is steep.
As far as your numbers, if you consider $155K to be your ARV (which I would think would probably be the highest you could estimate) and $10k in repairs, You're too far in at that point.
As far as the rental price, if I'm a resident, and I can pay you $1,500 a month to rent the house, or I can literally go across the street and purchase a home for the same payment and little to no money down, it is going to be difficult to convince me to rent from you.
Before you close the deal, I would run the numbers and make sure you're OK in the house at an $1,100-1,200 rent number. I don't have any research or comps to tell you those numbers, I just know that you can buy a pretty nice house in Baytown with an $1,100 payment.
Of course I'm being conservative here, but IMO it's better to back out of a deal at this stage than get in, put $10k add'l into it, and be stuck b/c the value isn't what you thought it might be, whether rent or purchase.
I'm just wondering how you came out with your numbers. The rent seems pretty far off from what you thought and what Joey says and he lives in the area.
@Kevin Auyong and Joey - while my rental numbers could be wrong but I (almost) cannot believe that it could be so wrong. I have 2 separate professionals who have done the rental comps based on real data. A realtor and a property management company.
Joey's method of estimating rent is not correct. No buy-and-hold investor can make money if the rent he/she will receive will be comparable to the mortgage payment the tenant would have to pay (if the tenant chooses to buy a similar property). There are too many other factors (and costs) that dictate rent for any neighborhood.
I do agree that if I were to sell the property - it has to compete with the other properties selling in the neighborhood including new construction. Similarly, I have to compete with other rental properties in the neighborhood when I rent it. However, I don't have to compete with the new homes available for sale (@ $1100 mortgage) when I have to rent for $1500 (or any other amount).
Call me an amateur if you will, but I'd say go to craigslist and check what things are renting out in the area. I'm currently a renter and I can tell you that I do pay more than a mortgage, but I do so because I like knowing in a year I can go someplace k
new anywhere in the world and not be tied down, not worry about home values, etc. This appeals to me quite a bit. In addition, I would choose a 50 year old home that looks new and upgraded over a newly built home any day.
On a side note, how are you financing? Cash? I'd do it, because that's a nice cash flow and you'll have equity in the home that you can use to finance other deals.
As I said in my initial response, I don't have any data or comps to support my estimate, it was based on my personal instinct that if my budget can accommodate a set monthly payment amount, and I have the choice to either rent or buy, I'm going to buy if the two houses are of similar quality(size, finishes, location etc).
I understand the different considerations made by a B&H investor, I simply wanted to give you a little insight into that particular area of town, to help make sure you get a better deal this time than your deal in Spring.
$1200 looks like the rent you are going to get for a 4 bed:
http://houston.craigslist.org/search/apa?catAbb=apa&query=baytown&zoomToPosting=&minAsk=&maxAsk=&bedrooms=4&housing_type=
https://www.rentometer.com/results/Y4k8l9cAiUY
To @Joey Ickes point, $1200 a month puts me in a $175k house with 5% down, taxes and insurance (2400/1200 respectively) included
With a total investment of 120k, this looks like it could be a good rental. But I don't think you're going to get $1500/month (which was 80th percentile on rentometer) unless you really make this place stand out. I sincerely hope you can get $1500/month, but I wouldn't calculate the investment based on that number.
I had checked craigslist and rentometer - but found no useful data.
@Jason Eyerly Yes, I am buying cash (although I don't like to include that factor to decide what to buy and for how much). I agree that rent is almost always more than the mortgage to allow for the flexibility (to move) that you mentioned.
@Aaron Montague@Joey Ickes I am not trying to defend the $1500 rent. May be I will get less. I am looking for some data from folks who have rented in that area. Estimating rent based upon the prevailing mortgage for a similar house is simply an incorrect method. Buy & hold investors specifically look to buy in the areas where prevailing rent is lot more (at least twice) than the mortgage. That is the whole basis of generating cash flow from rentals!
I wasn't condeming how you got your rent amount, but was curious as to your sources. I had properties out of state myself and can't tell you how many times rents were overstated to me by realtors and property managers. You are looking to buy for cash flow so getting accurate rents are important.
I learned lessons the hard way that once you owned the property suddenly the managers couldn't rent the place out for what they told you and were suggesting a drop in the asking amount which really screws up your numbers.
I work and live in the Baytown area. I have one of my rentals there also. I purchased it last year. It is 2006 construction, 3/2/2 1500sqft. And I get $1300 a month.
HAR.com shows a few rentals in that area of town listed for lease. That range is from $1250 to $1550. So the comps may not be as far off as others might think.
Totally agreed @Kevin Auyong . That is exactly what I am trying to find out, as even $100-$200 lower than estimated can screw up numbers.
Thanks @Michael Washburn for the very relevant information! Looks like rents have gone down since you bought (seasonally or otherwise). And I should probably assume rent in $1400-$1450.
@Michael Washburn - is your purchase also in same eastpoint sub-divison? (they say subdivisions matter a lot in Houston!) And given you own in the area - what is your opinion on my purchase price?
That house is way too big for a rental. Every time you have to paint or carpet, it will cost you a fortune. More sq. footage, more repairs, maintenance and cap ex that needs to be allotted. My max for rentals is about 1500.
You can put on the market and see what rents you can get. I'm sure you could find a family who would like the large space. I would guess 1300-1450 for rent.
I also agree the size is a little large and doesn't fit the typical 1500 sq. ft bread and butter buy and holds. You could rent it out for a year and sell it would be another option for you. Good luck
I just wanted to update this thread with what happened to my purchase of the property. I did a lot of comps and analysis and was convinced that I would get $1400 rent as worst case. And given that I was just starting out in Houston (this was 2nd property for me) - I went ahead with the purchase. The bank took 2 months to sort out some title issues and the property closed in late March. I also got to finally see the property during my trip to Houston in early April!
The rehab came to just about $10K as budgeted. And the place got rented within a week at my asking price of $1500 (actually $1495)!
It may not be the best of the deals - but it met my expectations and fits well in my strategy. Being out-of-state, compared to the alternative of buying turnkey, I feel much better creating my portfolio this way. There are some additional risks, but rewards make it worth the risk.
Sandeep: Thank you for the follow-up. For me, this highlights my one major issue with turnkey (BTW: I'm in the market for a turnkey). It's hard to find GOOD rental comps.
@Kay Yu Do you mean rental comps like what the average rents are in an area? Because I've had great success by using craigslist I just search the town i'm renting in and find places with the same # of beds and put them all in a spreadsheet. Once I have 10-20 I take the average and look at the top rents and see what their offering. I like to get top rents so I make sure our properties are in line with the top places in the area. Then to rent it quick I offer the same amenities as the top rentals a hundred or fifty dollars less per month.
@Sandeep S. Congrats that everything worked out well. Out of curiosity, how did you go about finding/rehabbing this house remotely? It seems hard to manage this remotely without a turnkey provider. What kind of resources do you recommend having on the ground in an area like Houston to be able to do a purchase remotely? From my understanding, PM is the most important, but did you do everything else (scheduling repairs, hiring inspector, attorney, title search, etc.) online?
I live in Baytown also. We have 5 children who have at one time or another, looked for rental property. At this time there are VERY few rental properties in and around Baytown. Due to the expansion of the Plants in the area. I believe it is a good deal!
Just as an update. It's been more than a year since I bought this property and rented it. The first tenant recently renewed the lease and the new rent is $1530. I am quite happy with rent going up along with inflation.
Since then I also appraised the property and got it financed in December. The appraisal came over $150K and my loan is approx $110K!!! So after a year, I am only $10K (rehab money) in and holding a nicely cash flowing asset.
I am quite satisfied and even more convinced that if you want to build a sizable portfolio of rentals (like I want to) - Turn Key is not the way to go.
As a final update - I now have 10 SFR homes in Houston and executing on the strategy I planned early last year. This particular purchase was #2. I have bought 8 more since then. Financing these homes at attractive terms, without seasoning, is still a challenge though. That is the biggest hurdle which prevents me to scale up to even larger numbers.
Sandeep, congrats on your success in Houston and thanks for sharing it with all of us. Sounds like you have excellent cash flow and you were able to cash out almost all of your money into it.
As for financing, I thought you had found a local bank to help you with your financing?
Just as an update. It's been more than a year since I bought this property and rented it. The first tenant recently renewed the lease and the new rent is $1530. I am quite happy with rent going up along with inflation.
Since then I also appraised the property and got it financed in December. The appraisal came over $150K and my loan is approx $110K!!! So after a year, I am only $10K (rehab money) in and holding a nicely cash flowing asset.
I am quite satisfied and even more convinced that if you want to build a sizable portfolio of rentals (like I want to) - Turn Key is not the way to go.
As a final update - I now have 10 SFR homes in Houston and executing on the strategy I planned early last year. This particular purchase was #2. I have bought 8 more since then. Financing these homes at attractive terms, without seasoning, is still a challenge though. That is the biggest hurdle which prevents me to scale up to even larger numbers.
How do you go about managing the rehabs from a distance? Do you have boots on the ground who manage this for you?
Sandeep, congrats on your success in Houston and thanks for sharing it with all of us. Sounds like you have excellent cash flow and you were able to cash out almost all of your money into it.
As for financing, I thought you had found a local bank to help you with your financing?
Thanks Johnson. I do have a local lender but their terms are not very attractive. I have another lender whose terms are attractive but is otherwise very slow (much like a conventional lender). And I don't have confidence if they will do second deal at same terms as the first. So I am still looking for a lender with which I can scale up. i.e. I don't have to pull hair out going through every financing. Do it once and it should be able to be repeated (if I am similar numbers the next time).